Fitch downgrades San Antonio’s creditworthiness

Chris Steele, (center, at lectern) president of the San Antonio firefighters union, speaks Wednesday April 11, 2018 on the steps of City Hall about a petition campaign to call for a city charter amendment election in November. Steele and his supporters delivered thousands of signatures to the city clerk after he and his supporters voiced their opinions outside of city hall.

Photo: John Davenport, STAFF / San Antonio Express-News

Fitch Ratings, one of the three major agencies that determine a city’s creditworthiness, has downgraded San Antonio’s long-standing AAA rating, citing a charter amendment pushed by the local firefighters union.

City officials had been bracing for a downgrade after the agency expressed concern in a Nov. 14 statement about San Antonio’s financial position in light of the voter-approved Propositions B and C.

The downgrade to AA+ means that San Antonio will have to spend more on interest rates and less on capital projects, such as the construction of the new fire and police stations, libraries and drainage projects.

“While it will be challenging, we are committed to the fiscal stewardship that will be required to regain our perfect bond rating,” said Mayor Ron Nirenberg. “I am confident in our ability to successfully address this situation.”

On Wednesday, City Manager Sheryl Sculley notified Nirenberg and the City Council that Fitch had issued the downgrade specifically because of Proposition C, which gives the San Antonio Professional Firefighters Association the unilateral ability to declare an impasse and demand binding arbitration on labor contract disputes.

But the other two rating agencies — Standard and Poor’s and Moody’s Investor Services — reaffirmed the city’s AAA status. It’s not yet clear how badly the Fitch downgrade will increase San Antonio’s interest rates on debt. Officials won’t know until they try to sell bonds. The disparate ratings will be taken into consideration when determining future interest rates, city officials said.

Sculley positioned San Antonio to earn the AAA status nine years ago and has maintained the rating ever since. San Antonio was the only city with a population of at least a million to earn a AAA rating. In her memo to the council, she laid the blame for the downgrade squarely on the firefighters association.

“The downgrade is solely a result of the Fire Union-submitted Propositions B and C which amended the City Charter during the most recent November election,” she wrote.

Later, in a statement to the media, she said, “We are disappointed in the downgrade, but unfortunately not surprised. The ratings agencies told us earlier this year that, if passed, the propositions on the November ballot could severely limit our financial flexibility and operation of the City organization. While the City’s financial position is stronger today than in our annual review last summer, this downgrade is directly related to propositions B and C.”

Union President Chris Steele did not respond to telephone calls seeking comment. He had previously suggested that concerns about a potential downgrade were overblown.

Fitch said in its notice that the downgrade “reflects the city’s diminished expenditure flexibility triggered by a voter-approved city charter amendment that permits firefighters to call for binding arbitration during future collective bargaining agreement (CBA) negotiations that result in an impasse.”

The downgrade applies to $2.5 billion in city and city-linked obligations. The agency’s lengthy report notes that San Antonio has allocated 63 percent of its general fund to public-safety services, including 25 percent on fire services.

Fitch also reports that San Antonio firefighters’ “compensation levels and benefits are far more generous than the state’s other large urban cities.” Because firefighters have gone without a raise since 2014, the city has not seen its salary budget for the department grow, but the savings have been “offset by continued costly benefits.”

Councilman Manny Pelaez said the fire union and its allies continually downplayed concerns of tarnishing the city’s credit rating throughout its campaign.

“It’s frustrating. For months, the Vote Yes campaign kept peddling the idea that warnings of a damaging credit score downgrade was just a scare tactic or a red herring,” he said. “Fitch’s downgrade is indisputable evidence that the ballot initiative hurt San Antonio’s economic forecast. It’s regrettable that we’re going to have to do a lot of work to undo this damage.”

Councilman Greg Brockhouse shrugged off the downgrade, saying that Fitch is out of step with the other agencies and that the city’s financial fundamentals haven’t changed. He then blamed the mayor and city manager, rather than the fire union, for the circumstances which led to the downgrade.

“The failed leadership of Ron Nirenberg and Sheryl Sculley have let basic functions like public safety contracts linger for years, instead of setting aside ego and getting the job done,” he said. “Binding arbitration wouldn’t matter and this downgrade would be a non-issue if we would have finalized public safety contracts. This is all the more reason to get back to the negotiating table and work with the Fire Union to end this years-long battle.”

Brockhouse said if the city can show it can work with the union to negotiate a new contract, then Proposition C becomes irrelevant.

Soon after the election, the city dropped a long-standing lawsuit against the union. For four years, Steele had said that he would begin contract negotiations within a week of the suit being dropped. But he’s yet to agree to begin negotiations.

“Councilman Brockhouse’s effort to shift responsibility for the downgrade is laughable,” Nirenberg said. “Everyone, including the agencies themselves, told us in advance this would happen. Councilman Brockhouse said it was just a scare tactic. Now voters know who was lying. ”

Councilman Rey Saldaña, who’s serving his final term on the council, characterized Brockhouse’s comments as “spin.”

“There’s no spinning this. The voters have spoken, and so have the rating agencies,” he said. “Tough political talk or rhetoric is not going to pay down the extra interest payments coming due — it will be hard-working taxpayers. The passage of Propositions B and C means basic infrastructure like fire stations, streets, drainage, parks and police equipment will cost more tomorrow than it did before the November vote.”

Fitch is owned by Hearst Corp., the parent company of the San Antonio Express-News.

After 10 years covering City Hall for the San Antonio Express-News, Baugh moved into the environment beat in February 2019.

A native of the Alamo City, Baugh was hired as a suburban-cities reporter at his hometown newspaper in 2006.

He began his newspaper career at the Denton Record-Chronicle while working on a master's degree in journalism at the University of North Texas and later covered Texas A&M University for The Eagle in College Station. He's covered various facets of government and politics ever since.

Baugh has previously written about public housing, county government and transportation for the Express-News.